Inventories and Equilibrium

Changes in aggregate demand produce changes
in the level of production and employment because businesses
respond to changes in demand by first changing the quantities
they produce, and only later changing prices.

A decrease in demand will show up, first,
as a rise in inventories; that rise in inventories will then
cause sales staffs and retailers to order fewer goods from the
factory. Production at the factory will be cut back, and the
economy will settle into a low-demand low-production equilibrium
at which inventories are once again stable.